Structural Reforms are Creating New Global Investment Opportunities

• Structural reforms across emerging and developed markets are reducing regulatory barriers, encouraging private investment, and potentially raising returns on capital.
• Governance, infrastructure, and capital-market reforms are creating investable opportunities across banks, construction, infrastructure, and equities, with Japan offering evidence that corporate reform can translate into stronger returns.
• Investors should look for durable policy changes, improving earnings and capital allocation, and attractive valuations—not simply reform announcements.

Artificial intelligence and geo-economic fragmentation dominate global investment themes right now. Together, they crowd out something quieter and, for long-term allocators, potentially more useful: a wave of structural reform that could lift returns on capital and potential growth across a wide swath of emerging and developed economies.

Markets tend to price reform first as a political story. Investment managers should instead treat it as a change in the prospective return on capital—and then identify where that change will appear first in earnings, balance sheets, and asset prices.

This is the third installment following our work on the resurgence in international markets and the limits of passive investing. Here, we focus on the reforms underway in international markets, the investable opportunities they may create, and the signals that indicate whether reform is actually durable.

Amid elevated financing needs, governments across a range of economies are turning to productivity-enhancing reforms and deregulation to stimulate private investment and improve the prospective returns from deploying capital1.

Chile, for instance, has introduced tax cuts along with a new investment framework reducing approval times of mining projects by 30% – 70% (amidst an investment pipeline backlog of almost $100B, which is equivalent to almost 30% of its 2025 GDP). Hungarians elected a new leader after 16 years on a reform-oriented platform that includes plans to improve rule of law and unwind sector-specific taxes. These concerns were the reasons that investment worth approximately $20 billion was blocked by the European Union and now has started to flow into to Hungary.

Even Europe, long characterized by slow growth and a heavy regulatory burden, has joined the trend, with a set of “simplification omnibus” packages aimed at reducing reporting requirements and efforts to fulfil the EU’s unrealized aspiration to create a genuine pan-European market. Chart 1 shows that the number of new legislative acts enacted in 2025 were at the lowest level this century. With regulation costing European businesses almost $175 billion annually (approximately1% of GDP), these steps are necessary to boost investment and productivity.

Chart 1: Number of Legislative Acts Adopted in EU are Falling

^{Source: National Sources, Author Calculations}

The policies differ, but the mechanism is similar: simplified taxes, reduced regulatory costs and policy uncertainty can reduce the hurdle rate for new investment. For investors, the important question is where those effects appear first. Deregulation drives productivity and spurs investment cycles2 that feed into credit growth and profitability at domestic banks along with increased activity among homebuilders. Those earnings and investment inflections, and not the reform announcements themselves, are the signals that reform is beginning to translate into returns.

Then there is the supply side. In a world of geopolitical fragmentation, governments are increasingly treating infrastructure, energy security, defense capacity, and resilient supply chains as economic as well as national-security priorities. Unlike traditional fiscal stimulus, the investment case depends on whether that spending expands productive capacity, removes bottlenecks, and ultimately raises potential growth.

Germany has mounted one of the largest responses, with a €500 billion, 12-year infrastructure fund carved out of its constitutional debt brake, although actual deployment has lagged. Across the Gulf, governments are also deploying significant financial resources into infrastructure and alternative sources of supply as regional instability in the Middle East reinforces the importance of supply-chain resilience. Analysts estimate a pipeline of more than $2 trillion over the next decade, including around $60 billion for direct energy infrastructure repair.

The first-order beneficiaries are construction and materials companies, engineering firms, and infrastructure credit. Over the longer run, this would also draw in private sector capital.

A third reform channel operates through domestic capital itself: getting more savings into financial markets while improving how companies put that capital to work. This is particularly relevant in Asia, where domestic savings are among the highest in the world (Chart 2) but have not always translated into efficient capital allocation or strong returns for minority shareholders. This, however, is also the opportunity as deploying this capital could significantly boost domestic market investability and returns.

Chart 2: Domestic Savings, as a Percentage of GDP

^{Source: IMF, National Sources, Author Calculations}

Japan has been at the forefront, using corporate governance reforms and pressure on companies trading below book value to encourage better capital allocation, higher payouts, and greater attention to return on equity. Korea's Value-Up program follows a similar logic. In Europe, the Savings and Investments Union is attempting something different but complementary: channeling more household savings toward capital markets and productive investment. Within emerging markets, Malaysia and Thailand have also launched their own programs. India, meanwhile, provides an example of what growing domestic participation can look like as household savings increasingly flow into equities (Chart 3), providing market support.

Chart 3: India: Monthly Flows in Domestic Mutual Funds Surge Through Systematic Investment Plans (INR Billions)

^{Source: Goldman Sachs}

These reforms have also led to a sharp increase in the shareholder activism in the Asian region, with Japan now overtaking Europe as the second-most active hub.

The investment implications operate both ways. Better corporate governance can raise return on equity through buybacks, dividends, and more disciplined capital allocation. Deeper domestic participation can create a more persistent source of demand for financial assets, reducing markets' dependence on foreign capital flows. For investors, rising payout ratios, buyback yields, return on equity, and the share of domestic ownership can therefore provide evidence that reform is translating into returns. Chart 4 shows that Japanese firms which have been noted as best examples of market reforms by Tokyo Stock Exchange (in yellow) have sharply outperformed firms which have just disclosed that they have done market reforms (green) and especially the ones which are lagging on these reforms (gray).

Chart 4: Japanese Companies That Embrace Reform Have Outperformed

^{Source: Indexed with early April 2022 set to 100; Tokyo Stock Exchange; Daiwa Asset Management. Note: The TSE classifies companies into “companies featured in the case studies,” “companies that have disclosed information,” and “companies under consideration or that have not disclosed information,” based on their response to requests regarding “management that takes capital costs and stock prices into account.}

Currency reform works differently from the other channels. Rather than improving the economics of investment at the margin, currency reforms and removing exchange-rate distortions can improve a market's investability by restoring price discovery, improving access to foreign currency, and giving investors greater confidence that they can enter and exit at a market-clearing price.

A wave of IMF-backed programs has helped drive that shift, with frontier markets leading the charge. Nigeria and Egypt are two leading examples, which have moved toward more market-determined exchange rates.

For global investors, these reforms can reopen markets that have effectively been closed due to a large parallel market currency premium and concerns around potential devaluations. For example, Nigeria used to have a 30%-50% black market currency premium, and it has disappeared after reforms.

But investability alone does not make an investment attractive; valuation still matters. That is where frontier markets remain notable. Frontier markets such as Sri Lanka and Kenya are markets that are investable but less established than emerging markets as they are constrained by size, liquidity, foreign ownership limits and market accessibility. Prior to the pandemic, frontier-market bond spreads were roughly comparable with emerging-market high yield issuers. However, despite a substantial decline in their spreads over the last two years, they remain considerably wider than much of the emerging-market complex (Chart 5). This is particularly notable at a time when sovereign ratings are on an upgrade cycle – thus potentially providing a decent margin of safety for investors with cheaper valuations.

Chart 5: After COVID, Emerging and Frontier Market Benchmark Spreads are Narrowing (basis points)

^{Source: IMF}

The first challenge for investors is distinguishing durable reform from political theater. Broad political and institutional support matters. Hungary's two-thirds supermajority and Germany's constitutional threshold, for example, provide different signals of durability than Chile's one-vote senate margin. So does the nature of the policy itself. Permitting reform or cutting red tape or any other measures that remove barriers to investment can alter an economy's productive trajectory; temporary subsidies or tax cuts or pre-election spending generally do not.

Public support is not always a prerequisite for success, but its absence increases friction. An OECD study found that reforms introduced without prior public backing are more likely to succeed when they generate visible benefits quickly—a difficult test for structural reforms whose effects can take years to emerge.

The second challenge is matching the kind of reform to investment opportunity for investors. For instance, fiscal and monetary normalization can appear first in local rates and domestic banks as it can drive valuation re-rating and improve macro-economic prospects. Supply-side reform can result in opportunities in construction, materials, engineering firms, and infrastructure credit. Governance reform can translate more directly into equities through improved capital allocation, buybacks, and payout growth. Currency reform is generally more relevant for frontier market economies, and can restore price discovery and investability, with reserve accumulation and foreign capital flows as measures of success.

Lastly, valuation determines a critical entry point. Historical financial cycles have shown that frontier markets are generally off investors’ radar and thus trading at cheap valuations – for the lack of historical reforms and policy inefficiencies. When investors realize the emergence of reform momentum, it can lead to long-term investment opportunities.

AI and geopolitics will keep dominating the headlines. But some of the most interesting opportunities may emerge beneath them, as structural reform changes the return on capital before markets fully price it.